7 ways to use debt sale in your lending strategy

Gone are the days where it's avoided like the plague because of worries over negative perceptions and creditors damaging their reputations. Debt purchasers have raised the bar when it comes to improved customer treatment and we're now seeing more and more creditors adopting this strategy.

In this blog, I'll explore the benefits of debt sale - some of which may not immediately spring to mind!

1. Cleaning up balance sheets

The historic reason to sell debt originated from large banks wanting to clean up their balance sheets, including a reduction in capital requirements. This is still the case today, but we're also seeing debt sale solve a host of other problems for creditors, utilities and telcos.

2. Removing issues around legacy portfolios

Migrating a legacy portfolio from one platform to another is not without challenges. Selling this portfolio offers a cleaner break, although due consideration for post-sale support is key.

3. Improving outcomes through specialist servicing

Managing large portfolios of accounts which are in both formal and informal arrangements (think insolvency or DMPs) is complex, costly, and comes with risk. Employing specialist servicers that have invested in efficiently managing these customer cases will result in better customer outcomes and a lower cost to serve.

4. Creating operational efficiency

Reductions in operational cost can be achieved by removal of non-paying accounts from recovery strategies. This frees up resource for more value-add collections activities.

5. Scaling lending books

FinTechs often have higher cost of funds than their larger rivals, and many funding facilities exclude arrears and defaulted accounts. This increases the equity requirements, which in turn drags their ability to grow their balance sheet. Lending is a scale game, and debt sale enables efficient recycling of that equity.

6. Arbitraging cost of funds

Some debt purchasers have an extremely low cost of funds akin to a bank's savings rates (also true of some other market participants). This means that there is a clear arbitrage for certain account segments for some organizations that pay higher rates for their debt capital.

7. Forecasting certainty

Forecasting returns from a variety of collections and recoveries activities (internal, DCA, litigation, etc) is difficult. Locking in a forward flow rate gives certainty to P&L and funding forecasts.

If you're not sure whether you should sell your debt, or you're wondering how to go about it, arum can help with the full end-to-end process, from debt portfolio analysis, right through to managing your bid process. Our independent advice combined with pragmatic delivery will deliver better customer and client outcomes.